Viewpoint

StockTwits May Change How You Trade

For a rookie, stock trading can be tough, especially in today's bear market. So when neophyte Carolyn Ferguson got started, she sought all the advice she could get. Known by her online handle, BullishBeauty, Ferguson found input aplenty, but not through what many traders would consider conventional channels, such as brokers, the Bloomberg terminal, or trading chat rooms.

Instead, BullishBeauty was tutored through a new microblogging tool called StockTwits, which lets users exchange trading advice in brief bursts, in real time. "There are plenty of pros there, folks with more money than I will probably ever see in my hands," BullishBeauty says, rattling off a litany of StockTwits users with such names as TraderAlamo, UpsideTrader, and Jsfalvo, whom she says have given her an inside edge. "All have answered every question I have asked. The willingness to help an inexperienced trader like myself is what StockTwits is all about."

For others, the months-old site is about a lot more than that. Launched in October by Internet entrepreneurs Howard Lindzon and Soren Macbeth, StockTwits uses the same technology that runs microblogging pioneer Twitter. "People were already talking about stocks on Twitter," says Lindzon, who also founded WallStrip, an irreverent finance-related video blog purchased by CBS (CBS). So Macbeth came up with a way to tag stock-related Twitter messages known as Tweets and aggregate them, Lindzon explains. "We were creating a filter to separate the chitchat and zero in on finance and trading through a simple platform that was global, lightweight, stable, and in real time."

Mixing with Ex-Hedge Fund Managers

In the intervening months, StockTwits has become a marketplace for ideas that lets amateurs mix it up with former hedge fund managers and such celebrity traders as Eric Bolling and Jon Najarian. Users say it compares favorably with a range of other trading-related social networking sites and portfolio-sharing sites, such as Covestor and Stockpickr, largely because it is so easy to use. Unlike Covestor and Stockpickr, StockTwits doesn't require registration or e-mail verification. And users don't need to create a portfolio of stocks to find potential matches or browse through professional portfolios for trading ideas.

Instead, with just a Twitter username and password, users are immersed in a virtual trading floor. "StockTwits is the modern version of traders shouting in the pits," said Bob Pasker, co-founder of WebLogic, a middleware maker that's now owned by Oracle (ORCL), and also a StockTwits user. And it's more efficient than chat rooms; there's no need to search through a labyrinth of stock forums that end up yielding poor and outdated information.

I, too, use StockTwits, and like many users, I benefit from the conversation with other traders. Thanks to the StockTwits community I was able to time a purchase of shares in the Financial Bull 3X exchange-traded fund to enjoy a 25% single-day gain during the week of Barack Obama's inauguration. The trade helped me end the month of January with a 6% gain, despite the market's losses. Having a constant stream of ideas flowing across a screen might seem distracting to some. In my case it has saved a lot of money because it has held me back from bad trades; it's a useful tool in assessing risk. Traders have this intuitive skepticism—and I prefer that to CNBC's unfounded optimism.

A Bloomberg for the Average Guy

According to Lindzon, StockTwits has more than 10,000 subscribers who spend an average of 15 minutes on the site and contribute 3,000 unique tweets per day. While these figures may seem small, StockTwits is a niche community and like Twitter or any other microblogging platform should not be subject to the same type of analytics used to measure traditional sites and blogs. Updates are made 140 characters at a time—like a short text message or instant message—and visits are brief and scattered throughout the day. "We're like a Bloomberg for the average guy and we're filling a void left by traditional media," Lindzon says. "And unlike financial chat rooms, we got rid of the spam and noise and gave users filters and a way to connect to other traders."

For communities like StockTwits, the key is knowing who follows whom, who posts the most and to whom. "What I like most is this new level of transparency or accountability everyone is holding themselves to, and I think we are finally seeing the break from the traditional money managers being looked upon as the stars of the community, and a system where performance is recognized regardless of the size of one's account," said Vincent Bagnato (aka TraderAlamo) of Finz.tv and an active member of the StockTwits community.

You like what one trader is doing? Simply press follow; you don't like what he had to say about IBM (IBM) or you find his trading style too risky? Don't follow him. It's that simple. Underperformers will be ignored, and rightly so—trading is a zero-sum game and bad advice is a waste of time and money. That's precisely what validates apps like StockTwits.

Forcing Traders to Be Accountable

Just like the credibility and objectivity crisis of sell-side analysts in 2001 led to a boom in financial blogs like Seeking Alpha and Barry Ritholtz's The Big Picture, the credibility crisis afflicting mainstream financial media today has led to a boom in investor social networks. Traders and investors alike have come to view these platforms as trusted filters that help them make more informed decisions because they can discuss and interpret the news with their peers. At the same time, unlike financial bloggers who make their mark by writing commentary and opinion pieces, StockTwits users are essentially creating a trading record that's scrutinized on a daily basis. A trader's reputation is always on the line, and that's the beauty of the financial social Web—it forces people to be accountable.

When asked how StockTwits will make money in the future, Lindzon is optimistic. "Look, we know that no one will pay for news, but in finance opinions are valuable and people pay money," he says. "At some point we're going to create a pay wall for premium content. The app is perfect as a teaser and subscribers can pay for additional services." For instance, the site may charge users to learn more about why a user is trading against a particular bank, or for educational tools based on a person's investing preference, Lindzon says. This strategy has paid off for other financial blogs that provide financial analysis, such as Nouriel Roubini's RGE Monitor.

At the same time, this is a risky proposition because the open and carefree environment that users enjoy now will certainly change once a pay wall is put in place. You're beginning to see it now when some superstar traders don't reciprocate and refuse to respond to some of their followers. Nevertheless, to preserve its democratic feel, StockTwits has to continue promoting this sense of fellowship. Perhaps designating levels of trading expertise might be a way to avoid isolating members. This would certainly create a more efficient and user-friendly community.

A Lot to Learn

For now, StockTwits represents promise for people like Ferguson. She admits she has a lot to learn but that StockTwits is where she wants to do it. "By following these traders I am learning to better discern entry and exit points," she says. "I have begun to learn details of trading I never even knew existed."

Zeledon is a former research analyst for International Data Group in San Francisco. He is currently researching the growth of the financial social Web and runs a digital consulting firm, Myagito.